Like The United States, Taiwan Is De

Taiwan's current president Tsai Ing-wen, gestures on stage during a rally. (Photo by Carl ... [+] Court/Getty Images)

Taiwan seems to have taken a cue from Washington. It, too, is making efforts to de-couple its economy from China's. Unlike Washington's approach, official Taipei policy shows little overt hostility to Beijing or China generally. On the contrary, Taipei seems to have held to a carefully balanced diplomatic line. Rather, it is Taiwanese business that is taking the lead, and for neither diplomatic nor political reasons. For its own narrow business interests, it is loosening its once irrefutably close Chinese connections. Some of the moves by Taiwanese business reflect fears about Beijing's military intentions. Mostly, the distancing reflects dispassionate assessments of profitability and risk. On this basis, the de-coupling movement would seem to have staying power.

Investment flows paint the most dramatic picture. Taiwanese direct investment into China has plummeted some 81% from the equivalent of $9.0 billion in 2017 to under $1.7 billion last year, the most recent period for which complete data are available. Nor is it that Taiwanese business has ceased investing generally. Rather, it has channeled investment efforts away from China. Southeast Asia and India have seen inflows that formerly would have gone there. Even the United States and Europe have gained at China's relative expense. Whereas China in the past regularly commanded fully two-thirds of all Taiwanese overseas investments, its relative position has shrunk to only one-third of Taiwan's total, slightly less than Singapore alone and about the same as Taiwan now invests in the United States. And because a large part of Taiwanese exports to China consists of components for assembly in Taiwanese operations, the investment shift has slowed the growth pace of electronics exports from Taiwan to China from a 24% rate of advance in 2020 to only 11% last year.

Doubtless, China's threatening military maneuvers around Taiwan have played a role in this investment and trade shift. Two more business-oriented considerations have had their effect. One is production costs, especially Chinese wages, which have risen dramatically relative to wages elsewhere. Taiwanese business has long favored Chinese operations to take advantage of China's inexpensive and disciplined workforce. But as China has developed, its wage scales have begun to catch up with wages elsewhere in Asia as well as in the developed west. From 2010 to 2021, for instance, the average factory wage in China rose some 247.0%, some 12% a year and far faster than wages in Europe or America. Wages in India and Southeast Asia also rose faster than in Europe and America but fell short of China's move. Chinese wages are still low by world standards, but the difference is by no means as compelling as it once was. One Taiwanese observer summed up the relative wage question this way: China is losing its "global factory" status.

A More immediate influence has emerged from the American tariffs on Chinese imports. Imposed by Donald Trump in stages during 2018 and 2019, Joe Biden, despite his penchant for undoing all that Trump did, has kept them in place. Because much Taiwanese investment in China supports goods later shipped to the United States, the tariffs made these Chinese operations a lot less attractive to Taiwanese business than they had been. Accordingly, Taiwanese investors began the process of shifting investment flows toward other economies not subject to the tariffs, places like India and Vietnam. Between 2019 and 2022, flows of Taiwanese technology to the United States originating from Vietnam doubled. Such product flows from India rose 72%. The emphasis on India will no doubt gain momentum now that Apple has plans to move 50% of its iPhone production to India by 2027, up from 5% at present.

Though the moves reflect individual business decisions rather than policy set by Taipei, Beijing has threatened to retaliate by terminating the Economic Cooperation Framework Agreement (ECFA) it has long had with Taiwan. Given the recent behavior of the People's Liberation Army, this threat is hardly likely to intimidate. Besides, that agreement now covers a mere 5% of all Taiwanese product flows to China. Rather than feeling threaten on the trade front, it looks as though Taiwan is well on its way to diversifying from a reliance on China while China still depends heavily on flows of Taiwanese semiconductors. Indeed, China's recent preference for military demonstrations and public threats of military action my reflect just how much the leadership in Beijing understands the economic asymmetry in Taiwan's favor.